1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended: Commission file number: JULY 31, 1996 0-14939 CROWN CASINO CORPORATION (Exact name of registrant as specified in its charter) TEXAS 63-0851141 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS (Address of principal executive offices) 75038-6424 (Zip Code) (214) 717-3423 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Title of Each Class September 10, 1996 ------------------- ------------------ Common stock, par value $.01 per share 11,113,759 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS CROWN CASINO CORPORATION July 31, 1996 April 30, (Unaudited) 1996 -------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 596,101 $ 668,853 Receivables 67,600 742,246 Prepaid expenses 35,212 49,766 Marketable equity securities 12,025,000 Debt securities 19,250,000 ------------- ------------- Total current assets 31,973,913 1,460,865 ------------- ------------- Property and equipment: Furniture, fixtures and equipment 1,970,779 1,892,666 Land held for development 16,169,709 16,169,709 ------------- ------------- 18,140,488 18,062,375 Less accumulated depreciation (238,714) (194,179) ------------- ------------- 17,901,774 17,868,196 ------------- ------------- Note receivable from LRGP 20,000,000 ------------- ------------- $ 49,875,687 $ 39,329,061 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 82,699 $ 72,773 Accrued liabilities 815,512 819,018 Income taxes payable 225,000 Capital lease obligations 4,833 6,329 Current portion of long-term debt 69,679 62,676 ------------- ------------- Total current liabilities 1,197,723 960,796 ------------- ------------- Long-term debt, less current portion 891,375 918,564 Deferred income taxes 4,745,000 4,000,000 Investment in SCGC 3,297,043 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.01 per share, 1,000,000 shares authorized; none issued or outstanding Common stock, par value $.01 per share, 50,000,000 shares authorized 11,558,659 issued and outstanding (11,650,559 at April 30, 1996) 115,587 116,506 Additional paid-in capital 41,548,420 41,784,088 Unrealized loss on securities (495,000) Retained earnings (accumulated deficit) 1,872,582 (11,747,936) ------------- ------------- Total stockholders' equity 43,041,589 30,152,658 ------------- ------------- $ 49,875,687 $ 39,329,061 ============= ============= See accompanying notes to consolidated financial statements. 2 3 CONSOLIDATED STATEMENTS OF OPERATIONS CROWN CASINO CORPORATION (UNAUDITED) Three Months Ended July 31, 1996 1995 ------------- ------------- Revenues $ - $ - Costs and expenses: General and administrative 601,918 614,794 Gaming development 18,556 64,954 SCGC pre-opening and development 536,110 Depreciation and amortization 44,535 43,527 ------------- ------------- 665,009 1,259,385 ------------- ------------- Other income (expense): Interest expense (25,111) (965,417) Interest income 601,095 495,679 Equity in loss of SCGC (940,035) Gain on sale of SCGC 14,934,543 21,512,640 ------------- ------------- 15,510,527 20,102,867 ------------- ------------- Income before income taxes 14,845,518 18,843,482 Provision for income taxes 1,225,000 8,098,000 ------------- ------------- Net income $ 13,620,518 $ 10,745,482 ============= ============= Earnings per share $ 1.16 $ .87 ============= ============= Weighted average common and common equivalent shares outstanding 11,781,160 12,318,684 ============= ============= See accompanying notes to consolidated financial statements. 3 4 CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN CASINO CORPORATION (UNAUDITED) Three Months Ended July 31, 1996 1995 ------------- ------------- Operating activities: Net income $ 13,620,518 $ 10,745,482 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 44,535 43,527 Amortization of debt issuance costs/discount 389,360 Deferred income taxes 1,000,000 8,098,000 Equity in loss of SCGC 940,035 Gain on sale of SCGC (14,934,543) (21,512,640) Changes in assets and liabilities, net of disposition: Receivables 674,646 (212,189) Prepaid expenses 14,554 (511,753) Accounts payable and accrued liabilities (381,080) 1,428 Income taxes payable 225,000 ------------- ------------- Net cash provided (used) by operating activities 263,630 (2,018,750) ------------- ------------- Investing activities: Purchase of assets (78,113) (4,130,293) ------------- ------------- Net cash used by investing activities (78,113) (4,130,293) ------------- ------------- Financing activities: Issuance of common stock 23,215 Purchase of common stock (236,587) Advances from LRGP 4,627,897 Payments of debt and capital lease obligations (21,682) (40,386) ------------- ------------- Net cash provided (used) by financing activities (258,269) 4,610,726 ------------- ------------- Decrease in cash and cash equivalents (72,752) (1,538,317) Cash and cash equivalents at: Beginning of period 668,853 1,692,440 ------------- ------------- End of period $ 596,101 $ 154,123 ============= ============= See accompanying notes to consolidated financial statements. 4 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CROWN CASINO CORPORATION (UNAUDITED) FOR THE THREE MONTHS ENDED JULY 31, 1996 NOTE A - BASIS OF PRESENTATION Crown Casino Corporation and subsidiaries (the "Company") is in the business of owning, operating and developing casino properties. Presently the Company owns an 18.6 acre tract of land in the gaming district of Las Vegas, Nevada, which may be used in the development of a hotel and casino, and in June 1996 the Company entered into a definitive asset purchase agreement to acquire the Mississippi Belle II, Inc. ("MBII") riverboat casino located in Clinton, Iowa (see Note C). On June 9, 1995 the Company sold a 50% interest in St. Charles Gaming Company, Inc. ("SCGC"), which owns and operates a riverboat casino located in Calcasieu Parish, Louisiana, to Louisiana Riverboat Gaming Partnership ("LRGP") (see Note B). SCGC was originally acquired by the Company in June 1993 and remained in the development stage until opening its riverboat casino in July 1995. On May 3, 1996 the Company sold its remaining 50% interest in SCGC to Casino America, Inc. ("Casino America"). The Company is actively pursuing gaming opportunities in these and other jurisdictions. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended July 31, 1996 are not necessarily indicative of the results that may be expected for the year ended April 30, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended April 30, 1996. NOTE B - SALE OF SCGC On June 9, 1995 pursuant to a definitive stock purchase agreement, the Company sold a 50% interest in SCGC to LRGP, a joint venture then owned 50% by Casino America and 50% by Louisiana Downs, Inc. LRGP owns the Isle of Capri(SM) dockside riverboat casino in Bossier City, Louisiana. The purchase price consisted of (i) a five-year $20 million non-recourse note with interest payable monthly at 11.5% per annum and secured by LRGP's 50% interest in SCGC (the "LRGP Note"), (ii) $1 million cash, and (iii) a warrant (which may only be exercised by converting a portion of the LRGP Note) to purchase 416,667 shares of Casino America common stock at $12 per share. In connection with this transaction the Company recorded a gain before income taxes of approximately $21.5 million. On May 3, 1996 the Company sold its remaining 50% interest in SCGC to Casino America for (i) 1,850,000 shares of Casino America common stock, (ii) the exchange of the $20 million LRGP Note for LRGP Note A ("Note A") and LRGP Note B ("Note B"), each in the principal amount of $10 million and bearing interest at 11.5% per annum, and (iii) an additional five-year warrant to purchase up to another 416,667 shares of Casino America common stock (bringing the total number of shares purchasable pursuant to warrants by the Company to 833,334) at an exercise price of $12 per share. In connection with this transaction, in May 1996, the Company recorded a gain before income taxes of approximately $14.9 million. Casino America has agreed to register the 1,850,000 shares issued to the Company in order that, providing such registration statement is effective, the Company may sell such shares in the open market. The Company has given Casino America an irrevocable proxy on the Casino America stock held by the Company, and the right of first refusal to purchase any Casino America stock the Company plans to sell in a single transaction of 500,000 shares or more, or in a series of related transactions to a single purchaser within a 120 day period. In connection with a rights offering declared by Casino America, the Company was granted the right to purchase 684,786 shares of Casino America common stock at a price of $5.875 per share. On August 6, 1996 the Company exercised its right and purchased 684,786 shares of Casino America common stock for an aggregate exercise price of $4,023,118. In August 1996 Casino America acquired the remaining interest in LRGP it did not already own and issued $315 million of 5 6 12 1/2% senior secured notes due 2003 (the "Casino America Bonds"), a portion of the proceeds of which was used to pay off Note A. As a result of the Casino America transactions, Note B has become an unsecured, subordinated obligation of Casino America, with interest payable monthly and principal due in seventeen equal fully amortizing quarterly payments beginning in June 1997 with final maturity in June 2001. The subordination language of Note B requires principal and interest payments to be made according to the terms of the note unless there is a payment default of (i) principal on, or (ii) interest on and a resulting acceleration of, the Casino America Bonds, in which case payments to the Company would be suspended during the pendency of such default. Prior to June 9, 1995 SCGC's operating results were consolidated with the Company. From June 9, 1995 (the date of sale of the first 50% interest in SCGC) through May 2, 1996 (the day prior to the sale of the Company's remaining 50% interest in SCGC) the Company accounted for its investment in SCGC on the equity method, and accordingly has included its proportionate share of SCGC's operating results in its consolidated results of operations. SCGC's operating results for the two days ended May 2, 1996 were not material. The Company's gain before income taxes on the sale of SCGC is calculated as follows (in thousands): Sale of Sale of First 50% Second 50% (June 1995) (May 1996) ----------- ---------- Consideration received in sale $ 21,000 $ 12,025 The Company's negative basis in stock sold 889 3,297 Transaction and other costs (376) (388) -------- -------- Gain before income taxes on sale of SCGC $ 21,513 $ 14,934 ======== ======== Upon closing of the sale of its remaining 50% interest in SCGC on May 3, 1996, the Company's investment in SCGC was eliminated. Other than a guarantee of certain leases, for which the Company has been indemnified by LRGP and Casino America, the Company is not liable for any obligations of SCGC. During the three months ended July 31, 1995 the Company included approximately $2 million of net costs and expenses, or approximately $.16 per share, attributable to SCGC in its consolidated results of operations. NOTE C - ACQUISITION OF MBII On June 11, 1996 the Company entered into a definitive asset purchase agreement to acquire the assets and operations of Mississippi Belle II, Inc. ("MBII") for a purchase price of $40 million. The MBII riverboat casino, located in Clinton, Iowa, has been owned and operated by members of the Kehl family (Robert J. Kehl is a director of the Company), and has been profitable since its opening in June of 1991. The MBII riverboat contains approximately 485 slot machines, 20 table games, and has on-board dining and entertainment facilities. In connection with the agreement the Company will enter into employment agreements with certain members of the Kehl family whereby MBII's existing management will continue to operate the Clinton facility. For the year ended December 31, 1995 MBII had revenues and pretax profits of $30.5 million and $9.5 million, respectively. The agreement contemplates closing of the transaction no later than November 15, 1996, unless extended by the parties. Closing is subject to certain conditions including financing arrangements and obtaining the approval of the Iowa Racing and Gaming Commission. In connection with the agreement the Company made a deposit by placing 85,000 shares of Casino America common stock owned by the Company in an escrow account. If the Company fails to close the acquisition, under certain circumstances, it could forfeit up to $750,000. In September 1996 the Company executed a commitment letter with a major bank for a $20 million loan, at the rate of prime plus 1%, to be used in the purchase of MBII. 6 7 NOTE D - COMMON STOCK In March 1996 the Company's Board of Directors approved a program to repurchase up to 500,000 shares (which was amended to 1,000,000 shares in May 1996) of the Company's common stock from time to time in the open market. Through July 31, 1996 the Company had repurchased 116,900 shares pursuant to this program. The timing and amount of future share repurchases, if any, will depend on various factors including market conditions, available alternative investments and the Company's financial position. The weighted average common and common equivalent shares outstanding used in the calculation of earnings per share includes 165,331 and 635,029 common equivalent shares for the three months ended July 31, 1996 and 1995, respectively. NOTE E - EQUITY AND DEBT SECURITIES Equity and debt securities consisted of the following at July 31, 1996: Fair Market Unrealized Value Cost Basis Loss ------------ ------------ ----------- Casino America common stock (1,850,000 shares) $ 12,025,000 $ 12,025,000 $ - Note A receivable from LRGP 10,000,000 10,000,000 - Note B receivable from LRGP 9,250,000 10,000,000 (750,000) ------------ ------------ ----------- $ 31,275,000 $ 32,025,000 (750,000) ============ ============ Tax benefit for unrealized loss at 34% 255,000 ----------- Net unrealized loss included in stockholders' equity $ (495,000) =========== The cost basis of the 1,850,000 shares of Casino America common stock held by the Company was determined based upon the average of the high and low bid prices of such stock as quoted on the NASDAQ National Market System on the date of closing (May 3, 1996), discounted to reflect that such shares were not registered. The fair market value of the 1,850,000 shares of Casino America common stock was determined based upon the average of the high and low bid prices of such stock as quoted on the NASDAQ National Market System on July 31, 1996, discounted to reflect that such shares were not registered. Included in the 1,850,000 shares of Casino America common stock owned by the Company are 85,000 shares which are held by an escrow agent as a deposit in connection with the proposed acquisition of MBII (see Note C). The fair market value of Note B at July 31, 1996 is not readily determinable since such note was issued in a private transaction and is not traded, nor is the Company aware of a security with similar terms that does trade. However, on August 6, 1996, in connection with Casino America's issuance of the Casino America Bonds, Note A was paid off and Note B became an obligation of Casino America. Interest on Note B is payable monthly at 11 1/2% per annum, and principal is due in seventeen equal fully amortizing payments beginning in June 1997 with final maturity in June 2001. Based upon the 12 1/2% yield of the Casino America Bonds at issuance, and factoring in an estimated premium for the differences in security, ranking and liquidity, management believes the fair market value of Note B was approximately $9,250,000 at July 31, 1996. The fair market value of Note A was deemed to be equal to its face value on July 31, 1996 since its payoff was imminent on such date. During the three months ended July 31, 1996 management determined, principally as a result of entering into a definitive asset purchase agreement to acquire MBII (see Note C), that the Company was likely to sell or otherwise dispose of Notes A and B prior to their scheduled maturity in June 2001. Accordingly, such securities are deemed "available-for-sale" and are carried at their estimated fair market value, with any unrealized gains or losses being reported as a separate component of stockholders' equity. 7 8 NOTE F - COMMITMENTS AND CONTINGENCIES Litigation On September 21, 1994 an action was filed against the Company and SCGC in the 24th Judicial District Court for the Parish of Jefferson, Louisiana by Avondale Industries, Inc. ("Avondale"). In this action Avondale alleges that the Company was contractually obligated to Avondale for the construction of SCGC's riverboat vessel based upon a letter of intent (allegedly reaffirming a previous agreement entered into between Avondale and SCGC). Avondale alleges that the Company breached a duty to negotiate in good faith toward the execution of a definitive vessel construction contract. Alternatively, Avondale alleges that a separate oral contract for the construction of the vessel existed and that the Company committed unspecified unfair trade practices and made certain misrepresentations. Avondale seeks unspecified damages including "all lost profits and lost overhead" and attorneys fees. Avondale has claimed its lost profits and lost overhead amount to approximately $2.5 million. The Company intends to vigorously contest liability in this matter. While no assurance can be given as to the ultimate outcome of this litigation, management believes that this litigation will not have a material adverse effect on the Company. Severance Agreements In July 1996 the Board of Directors of the Company authorized the Company to enter into severance agreements with three of its executive officers which provide for payments to the executives in the event of their termination after a change in control, as defined, of the Company. These agreements will provide, among other things, for a compensation payment equal to 2.99 times the annual compensation paid to the executive as well as accelerated vesting of options under the Company's incentive stock option plan. Louisiana Local Option Referendums As of August 6, 1996 the Company was the holder of 2,534,786 shares of Casino America common stock and a $10 million note receivable from Casino America. Casino America currently operates four gaming facilities, two in Mississippi and two in Louisiana. In April 1996 Louisiana gaming statutes were modified to provide for a local option vote to decide whether or not to continue riverboat gaming, video draw poker and the New Orleans land-based casino. The vote will be conducted on a parish-by-parish basis in November 1996 with separate votes for each form of gaming. The discontinuation of riverboat gaming in Bossier Parish or Calcasieu Parish would have a material adverse effect on Casino America and, to the extent the Company continues to hold a material amount of securities of Casino America, the Company. Based upon published polls, the Company believes that the vote to continue riverboat gaming in the two parishes in which Casino America operates will be approved, although there can be no assurance as to the outcome of the referendums. NOTE G - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures are as follows for the three months ended July 31, 1996 and 1995: Three Months Ended July 31, 1996 1995 ----------- ----------- Note received for sale of first 50% interest in SCGC $20,000,000 Stock received for sale of second 50% interest in SCGC $12,025,000 Interest paid, net of amount capitalized 33,493 1,045,162 8 9 CROWN CASINO CORPORATION PRO-FORMA FINANCIAL INFORMATION PREPAYMENT OF NOTE A AND CASINO AMERICA STOCK PURCHASE On or about August 6, 1996 Casino America acquired the remaining interest in Louisiana Riverboat Gaming Partnership it did not already own and issued $315 million of senior secured notes, a portion of the proceeds of which was used to pay off Note A in the amount of $10 million. Also on such date, pursuant to a rights offering declared by Casino America, the Company exercised its right and purchased 684,786 shares of Casino America common stock for an aggregate exercise price of $4,023,118. As a result of the Casino America transactions, Note B has become an unsecured, subordinated obligation of Casino America. PENDING ACQUISITION OF MISSISSIPPI BELLE II On June 11, 1996 the Company entered into a definitive asset purchase agreement to acquire the assets and operations of Mississippi Belle II, Inc. ("MBII") for a purchase price of $40 million. MBII has been operating a riverboat casino in Clinton, Iowa since June of 1991. Closing of the transaction is subject to certain conditions including financing arrangements and obtaining the approval of the Iowa Racing and Gaming Commission. The Company anticipates raising the purchase price from some combination of (i) the issuance of $20 million of debt to a bank for which the Company has received a commitment letter, (ii) cash on hand, (iii) the sale of all or a portion of the Company's 2,534,786 shares of Casino America common stock, (iv) the sale of the Company's Las Vegas land, and/or (v) the sale of Note B. For purposes of these pro-forma financial statements, it is assumed that the Company's sources of cash to pay the purchase price will come from (i) issuing $20 million of debt to a bank, (ii) selling all of its Casino America common stock at market value, and (iii) using cash on hand for the balance of the purchase price. PRO-FORMA FINANCIAL STATEMENTS The following Pro-Forma Consolidated Balance Sheet of the Company as of July 31, 1996 gives effect to (i) the prepayment of Note A, (ii) the purchase of 684,786 shares of Casino America common stock, and (iii) the acquisition of MBII, as if such transactions had occurred on such date. The following Pro-Forma Consolidated Statement of Operations of the Company for the three months ended July 31, 1996 gives effect to (i) the prepayment of Note A, (ii) the purchase of 684,786 shares of Casino America common stock, and (iii) the acquisition of MBII, as if such transactions had occurred on May 1, 1996. The pro-forma information is based on the historical financial statements of the Company and MBII giving effect to the transactions described above and the adjustments described in the accompanying Notes to Pro-Forma Consolidated Financial Statements, and may not be indicative of the results that actually would have occurred had the transactions taken place on the dates indicated or the results which may be obtained in the future. 9 10 CROWN CASINO CORPORATION PRO-FORMA CONSOLIDATED BALANCE SHEET UNAUDITED JULY 31, 1996 (IN THOUSANDS) Note A Prepayment Historical and Stock Acquisition Pro-Forma Crown Purchase of MBII Consolidated ---------- ---------- ----------- ------------ Current assets: Cash and cash equivalents $ 596 $ 5,977 (a) $ (3,924)(f) $ 2,649 Other current assets 103 300 403 Marketable equity securities 12,025 4,451 (b) (16,476) Debt securities 19,250 (10,000)(c) 9,250 -------- --------- ---------- ----------- Total current assets 31,974 428 (20,100) 12,302 -------- --------- ---------- ----------- Property and equipment: Furniture, fixtures and equipment 1,971 5,700 7,671 Riverboat 10,000 10,000 Land, buildings and improvements 1,700 1,700 Land held for development 16,170 16,170 -------- ---------- ----------- 18,141 17,400 35,541 Less accumulated depreciation (239) (239) -------- ---------- ----------- 17,902 17,400 35,302 -------- ---------- ----------- Goodwill and other 22,700 22,700 -------- --------- ---------- ----------- $ 49,876 $ 428 $ 20,000 $ 70,304 ======== ========= ========== =========== Current liabilities: Accounts payable and accrued liabilities $ 898 $ 898 Income taxes payable 225 $ 1,746 (d) 1,971 Debt and capital lease obligations 75 $ 2,600 2,675 -------- --------- ---------- ----------- Total current liabilities 1,198 1,746 2,600 5,544 -------- --------- ---------- ----------- Long-term debt, less current portion 891 17,400 18,291 Deferred income taxes 4,745 (1,600)(d) 3,145 Stockholders' equity 43,042 282 (e) 43,324 -------- --------- ---------- ----------- $ 49,876 $ 428 $ 20,000 $ 70,304 ======== ========= ========== =========== See accompanying Notes to Pro-Forma Consolidated Financial Statements. 10 11 CROWN CASINO CORPORATION PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 1996 UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA) Historical Historical Pro-Forma Crown MBII Adjustments Consolidated ---------- ---------- ----------- ------------ Revenues: Casino $ 7,249 $ 7,249 Food and beverage 479 479 Other 65 65 ------- -------- 7,793 7,793 ------- -------- Costs and expenses: Casino 4,652 $ (477)(g) 4,175 Food and beverage 292 292 General and administrative $ 602 346 948 Gaming development 19 19 Depreciation and amortization 44 190 379 (h) 613 -------- ------- ------- -------- 665 5,480 (98) 6,047 -------- ------- ------- -------- Other income (expense): Interest expense (25) (125) (371)(i) (521) Interest income 601 132 (420)(j) 313 Gain on sale of remaining 50% of SCGC 14,935 14,935 -------- ------- ------- -------- 15,511 7 (791) 14,727 -------- ------- ------- -------- Income before income taxes 14,846 2,320 (693) 16,473 Provision for income taxes 1,225 651 (k) 1,876 -------- ------- ------- -------- Net income $ 13,621 $ 2,320 $(1,344) $ 14,597 ======== ======= ======= ======== Earnings per share $ 1.16 $ 1.24 ======== ======== Weighted average common and common equivalent shares outstanding 11,781 11,781 ======== ======== See accompanying Notes to Pro-Forma Consolidated Financial Statements. 11 12 CROWN CASINO CORPORATION NOTES TO PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PERCENTAGES) BALANCE SHEET a - Proceeds from the prepayment of Note A $10,000 Purchase of 684.8 shares of Casino America common stock (4,023) ------- $ 5,977 ======= b - Market value per share of Casino America common stock $ 6.50 Number of Casino America shares purchased 684.8 ------- $ 4,451 ======= c - To reflect the prepayment of Note A. d - Reclassification of deferred income taxes to income taxes payable upon the prepayment of Note A which for income tax purposes has been treated as an installment sale. $ 1,600 Income tax on unrealized gain of Casino America common stock ($428 x 34%) 146 ------- $ 1,746 ======= e - Unrealized gain on the purchase of Casino America common stock $ 428 Less income tax on unrealized gain at 34% (146) ------- $ 282 ======= f - Payment of purchase price of MBII $40,000 Payment of debt issuance costs 400 Proceeds from bank borrowings (20,000) Proceeds from sale of Casino America common stock (16,476) ------- Cash on hand used in acquisition $ 3,924 ======= STATEMENT OF OPERATIONS g - To eliminate rent paid by MBII to lease the riverboat from a related party. Since the riverboat will be acquired by the Company in the acquisition the rent payments will be eliminated. h - To adjust MBII depreciation and amortization to reflect a stepped-up basis in the assets of MBII upon its acquisition by the Company. i - To adjust MBII interest expense as follows: Eliminate existing interest expense $ 125 Interest expense on $20,000 of bank debt at 9.25% (463) Amortization of debt issuance costs (33) ------- $ (371) ======= 12 13 j - To adjust interest income as follows: To eliminate interest income on Note A $ (288) To eliminate MBII interest income on a note receivable not being purchased (132) ------- $ (420) ======= k - To record a provision for income taxes on the income before income taxes of MBII and the adjustments described above based upon a 40% effective income tax rate. MBII is currently a subchapter S corporation and does not pay corporate income taxes. Upon completing the acquisition the Company anticipates it will cause MBII to become a subchapter C corporation and file a consolidated income tax return with the Company. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements appearing elsewhere in this report. OVERVIEW The Company owns an 18.6 acre tract of land in the gaming district of Las Vegas, Nevada which may be used in the development of a hotel and casino, and in June 1996 the Company entered into a definitive asset purchase agreement to acquire the Mississippi Belle II, Inc. ("MBII") riverboat casino located in Clinton, Iowa. The Company is also actively pursuing other gaming opportunities in these and other jurisdictions. In June 1993 the Company completed the acquisition of 100% of the outstanding common stock of St. Charles Gaming Company, Inc. ("SCGC"), a Louisiana corporation, which had received preliminary approval from the Louisiana Riverboat Gaming Commission to construct and operate a riverboat gaming casino. In March 1994 SCGC received a license from the Louisiana Riverboat Gaming Enforcement Division of the Office of State Police. In January 1995 SCGC made the strategic decision to relocate the site for its planned Louisiana riverboat casino from St. Charles Parish (near New Orleans) to Calcasieu Parish in the southwest part of the state near the Texas border. In June 1995 the Company sold a 50% interest in SCGC to Louisiana Riverboat Gaming Partnership ("LRGP"), a joint venture then owned 50% by Casino America, Inc. ("Casino America") and 50% by Louisiana Downs, Inc. LRGP owns the Isle of Capri(SM) dockside riverboat casino in Bossier City, Louisiana. The purchase price consisted of (i) a five-year $20 million note (the "LRGP Note"), (ii) $1 million cash, and (iii) a warrant (which may only be exercised by converting a portion of the LRGP Note) to purchase 416,667 shares of Casino America common stock at $12 per share. In connection with this transaction the Company recorded a pretax gain of approximately $21.5 million. In July 1995 SCGC's riverboat casino opened for business in Calcasieu Parish, Louisiana as an Isle of Capri(SM) themed property. In May 1996 the Company sold its remaining 50% interest in SCGC to Casino America for (i) 1,850,000 shares of Casino America common stock, (ii) the exchange of the $20 million LRGP Note for LRGP Note A ("Note A") and LRGP Note B ("Note B"), each in the principal amount of $10 million and bearing interest at 11.5% per annum, and (iii) an additional five- year warrant to purchase up to another 416,667 shares of Casino America common stock (bringing the total number of shares purchasable pursuant to warrants by the Company to 833,334) at an exercise price of $12 per share. In connection with this transaction, in May 1996, the Company recorded a gain before income taxes of approximately $14.9 million. In August 1996 Casino America acquired the remaining interest in LRGP it did not already own and issued $315 million of 12 1/2% senior secured notes due 2003 (the "Casino America Bonds"), a portion of the proceeds of which was used to pay off Note A. As a result of the Casino America transactions, Note B has become an unsecured, subordinated obligation of Casino America, with interest payable monthly and principal due in seventeen equal fully amortizing quarterly payments beginning in June 1997 with final maturity in June 2001. The subordination language of Note B requires principal and interest payments to be made according to the terms of the note unless there is a payment default of (i) principal on, or (ii) interest on and a resulting acceleration of, the Casino America Bonds, in which case the payments to the Company would be suspended during the pendency of such default. The original Casino America warrant received in the sale of the first 50% of SCGC and the additional Casino America warrant received in the sale of the remaining 50% of SCGC, both of which expire in May 2001, may only be exercised by converting all or a portion of the principal amount of Note B based upon a $12 per share exercise price. In connection with a rights offering declared by Casino America, the Company was granted the right to purchase 684,786 shares of Casino America common stock at a price of $5.875 per share. On August 6, 1996 the Company exercised its right and purchased 684,786 shares of Casino America common stock for an aggregate exercise price of $4,023,118. In June 1996 the Company entered into a definitive asset purchase agreement to acquire the assets and operations of the MBII riverboat casino located in Clinton, Iowa for a purchase price of $40 million. The MBII riverboat contains approximately 485 slot machines, 20 table games and has on-board dining and entertainment facilities. For the year ended December 31, 1995 MBII had revenues and pretax profits of $30.5 million and $9.5 million, respectively. See Note C. 14 15 RESULTS OF OPERATIONS Prior to June 9, 1995 SCGC's operating results were consolidated with the Company. From June 9, 1995 (the date of sale of the first 50% interest in SCGC) to May 2, 1996 (the day prior to the sale of the Company's remaining 50% interest in SCGC), the Company accounted for its investment in SCGC on the equity method, and accordingly has included its proportionate share of SCGC's operating results in its consolidated results of operations. Accordingly, operating results for the current and prior fiscal quarters are not entirely comparable. THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THE THREE MONTHS ENDED JULY 31, 1995 General and administrative expenses for the three months ended July 31, 1996 decreased $12,876 compared to the same period in the prior fiscal year. The decrease was a result of lower legal and consulting costs, partially offset by higher travel, rent and franchise taxes. Gaming development costs for the three months ended July 31, 1996 decreased $46,398 compared to the same period in the prior fiscal year principally as a result of the Company ceasing to pursue a riverboat gaming license in the State of Illinois. SCGC pre-opening and development costs for the three months ended July 31, 1996 decreased $536,110 compared to the same period in the prior fiscal year as a result of the Company no longer consolidating SCGC's operating results from and after June 9, 1995. Interest expense for the three months ended July 31, 1996 decreased $940,306 compared to the same period in the prior fiscal year. The decrease was the result of the Company no longer consolidating SCGC's operating results from and after June 9, 1995. Interest income for the three months ended July 31, 1996 increased $105,416 compared to the same period in the prior fiscal year. The increase was the result of interest being recognized in the current fiscal period on $20 million of notes receivable from LRGP for a full fiscal quarter, whereas in the prior fiscal period such $20 million receivable was not outstanding during the entire period. LIQUIDITY AND CAPITAL RESOURCES As of August 6, 1996 after (i) the sale of the Company's remaining 50% interest in SCGC, (ii) receiving a $10 million prepayment on Note A, and (iii) purchasing an additional 684,786 shares of Casino America common stock, the Company's sources of liquidity included (a) $6.1 million in cash, (b) the sale of all or a portion of the Company's 2,534,786 shares of Casino America common stock (which stock was valued at approximately $18.4 million on such date), (c) the sale of Note B, (d) the sale of the Company's Las Vegas land, and (e) the issuance of debt and/or equity. See "Overview". In August 1996 Casino America filed a registration statement with the Securities and Exchange Commission to register the 1,850,000 shares of Casino America common stock received by the Company in the sale of the Company's remaining 50% interest in SCGC, which registration statement has not as yet been declared effective. During the effectiveness of such registration statement the Company may sell such shares in the open market. The 684,786 shares of Casino America common stock purchased by the Company pursuant to the Casino America rights offering are freely tradable shares and may be sold by the Company at any time. In connection with the proposed acquisition of the MBII riverboat casino the Company anticipates raising the $40 million purchase price from some combination of (i) the issuance of $20 million of debt to a bank for which the Company has received a commitment letter, (ii) cash on hand, (iii) the sale of all or a portion of the Company's Casino America common stock, (iv) the sale of the Company's Las Vegas land, and/or (v) the sale of Note B. In March 1996 the Company's Board of Directors approved a program to repurchase up to 500,000 shares (which was amended to 1,000,000 shares in May 1996) of the Company's common stock from time to time in the open market. At July 31, 1996 the Company had repurchased 116,900 shares pursuant to this program. The timing and amount of future share repurchases, if any, will depend on various factors including market conditions, available alternative investments and the Company's financial position. Management of the Company continues to evaluate the potential development of a hotel and casino project on the Company's 18.6 acre tract of land in Las Vegas. Management is considering a variety of scenarios with respect to the operation and ownership of the proposed hotel and casino, including a potential joint venture relationship, but currently has no definitive development plan in place. In connection with the stock purchase agreement with LRGP, the Company granted LRGP a right of first refusal, which expires in June 1998, to develop such project with the Company in the event the Company chooses to 15 16 develop such project on a joint venture basis. In addition to seeking an acceptable joint venture arrangement, the Company has considered selling its Las Vegas land and has had discussions with certain parties in that regard, although no agreement has been reached with any party respecting such a sale. 16 17 CROWN CASINO CORPORATION FORM 10-Q PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On September 21, 1994 an action was filed against the Company and SCGC in the 24th Judicial District Court for the Parish of Jefferson, Louisiana by Avondale Industries, Inc. ("Avondale"). In this action, Avondale alleges that the Company was contractually obligated to Avondale for the construction of SCGC's riverboat vessel based upon a letter of intent (allegedly reaffirming a previous agreement entered into between Avondale and SCGC). Avondale alleges that the Company breached a duty to negotiate in good faith toward the execution of a definitive vessel construction contract. Alternatively, Avondale alleges that a separate oral contract for the construction of the vessel existed and that the Company committed unspecified unfair trade practices and made certain misrepresentations. Avondale seeks unspecified damages including "all lost profits and lost overhead" and attorneys fees. Avondale has claimed its lost profits and lost overhead amount to approximately $2.5 million. The Company intends to vigorously contest liability in this matter. While no assurance can be given as to the ultimate outcome of this litigation, management believes that this litigation will not have a material adverse effect on the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 27 Financial data schedule (filed herewith) (b) Reports on Form 8-K: There were no reports on Form 8-K filed in the first quarter of the current fiscal year. 17 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CROWN CASINO CORPORATION By: /s/ MARK D. SLUSSER ------------------------------------ Mark D. Slusser Chief Financial Officer, Vice President Finance and Secretary (Principal Financial and Accounting Officer) Dated: September 12, 1996 18 19 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule